Public Option Options: The Unknown Unknowns

By Marc Ambinder

Here's a thumbnail guide to the public option options out there. For a great graphical representation, check out Nate Silver's work. For a tight look at the Senate's options, read Ezra Klein's.

To figure out what the public option will do, you first need to know

(1) Who pays for it -- the government or individuals through premiums?(2) Who gets to participate? Everyone? Small businesses?

(3) How much providers are paid, and who gets to set the rates?(4) Do states get to opt-in, or opt-out? How large does a public option have to be in order to have any effect? What's the existing market like?(5) Does it kick in immediately? Is there a trigger?

"Medicare + 5" -- all states would be required to offer a public option in their exchanges. Hospitals would be reimbursed at Medicare rates; doctors would be reimbursed at Medicare's rates + 5%. Proponents hope private insurers will lower costs and premiums to match a federally-subsidized plan. Enrollment will be high, and the risk pool will be concentrated, leading, perhaps, to higher costs for the government in the long-run. This strong version of a public plan would be in a good position in states with large numbers of uninsured people and a fairly large menu of existing options; lots of smaller players means that the public option would immediately become the largest fish in the risk pool, so to speak. The industry controls more than 80% of the market in eight states -- Hawaii, Rhode Island, Alaska, Vermont, Alabama, Maine, Montana, Wyoming, Arkansas and Iowa. Across the country, according to an HCAN survey, the largest insurer in a state controls, on average, about 44% of the small business market.

Politics: Nancy Pelosi's preferred option; this is also what Sen. Jay Rockefeller has been pushing. Currently, there aren't enough votes for this option in the House and the Senate.

"Negotiated Rates" -- if states can negotiate how much the plan pays doctors, hospitals and other providers, the plan won't be as attractive initially, and it will have to work harder in order to gain the type of bargaining power that a more robust option with more limited payments to providers would provide.

Politics: In the House, a majority of Democrats would probably sign on to a bill that included a "negotiated rate" option along with higher subsidies for the poor. Does the government subsidize this public option initially? Or is it paid for entirely from premiums? Without a subsidy, notes Brookings's Henry Aaron, this type of public option isn't like to have much effect.

Opt-In Public Option: States would have to affirmatively choose to participate in a public option.

Politics: a lot of governors like this idea, as it preserves their flexibility but does not force their hand. It has the support of some senators, like Delaware's Tom Carper, as well. (Even Sen. Jon Kyl supports an opt-in.) What would happen if a handful of states opted-in to a public option with negotiated rates that's funded entirely through premiums? Depends. On the one hand, more liberal states with only one or two major insurance companies could decide to opt-in in order to force the market to compete, but if the public option isn't subsidized or given a leg up, it won't achieve much in the way of competition. States with many insurance options would have no incentive to opt-in; the political opposition to the public option might prevent its introduction in states like Texas, where a real experiment could be performed. Carper's version of this idea would allow states to set up their own public plans and then enter into "regional exchanges" with other states in order to increase the size -- and clout -- of the public options.

Opt-Out Public Option: The public option would be offered automatically; states would have to opt-out.

Politics: opting out is much harder than settling for the default. There would be pressure, even on conservatives, to accept public options in states with little insurance competition and higher rates of the uninsured. Smaller public options wouldn't work well in states with lots of existing insurance options (and none that dominates the market). On the other hand, if bigger states opted out -- or it a lot of states opted out -- a negotiated-rate public option wouldn't have much of an effect nationwide, except perhaps by example. States where private reimbursement rates are a lot higher than Medicare will face significant pressure from docs and hospitals to opt out.

Trigger mechanism: Associated with Sen. Olympia Snowe, the failure of insurance companies to reform and to cut costs would trigger a nationwide public option.

Politics: Snowe's belief is that insurers, anticipating what could happen if they fail to meet cost and care standards, would feel enough pressure and reform on their own. It's a Sword of Damocles option -- Snowe's national public option would have to be pretty robust in order to keep insurers in check. The trigger mechanism is rejected by many Democrats, who worry that it will be constructed in a way that prevents its ever being pulled.